It is an unfortunate reality for the residents of Memphis that high
on the list of local claims to fame--along with Blues, and Elvis--is
crime. Memphis ranks 13th in crime per capita on a list of cities with
populations of 75,000 and greater. Narrow that list to cities with
populations of half a million or more residents, and Memphis jumps to
4th place. And, among Metropolitan Statistical Areas, the eight-county
Memphis, TN-MS-AR region is second only to the Detroit area in terms of
crime--hardly a silver medal any of us would like to hang from our
mantles.

Despite recent reductions in crime--both violent and property
crimes were down in January and February 2007 compared to year-earlier
numbers, a trend that appears to have begun in late 2006--the city has
years of rising crime and a declining population to overcome. Crime
inflicts many costs on a city's residents, including feelings of a
lack of security and safety, the monetary value of property loss from
criminal acts, lost earnings from injury or death, and the impact of
crime on property values. It is this last issue that this article
addresses.

While no specific research has been done to date on the impact of
crime on property values in the Memphis area, there are numerous studies
in the economics literature that examine the question. Not surprisingly
and nearly unanimously, the literature concludes that crime tends to
depress property values, although estimated magnitudes of incidence vary
from study to study. As will be discussed later, the implications of
these magnitudes are of particular importance from a public policy
perspective, vis-a-vis the elasticity of property values with respect to
crime.

The theoretical effect of crime on property values is fairly
straightforward. Households experience disutility from crime near their
homes and as a result would be expected to reduce their bid prices for
housing in areas where crime is more prevalent. This theoretical
prediction is largely borne out in the existing literature on crime and
property values, although the degree to which higher crime affects
property values is a matter of debate. Much of the difference in
estimates likely depends on estimation techniques, the measurement of
crime as well as property values, and the size of the sample studied.

There are two general approaches in the literature to measuring the
impact of crime on property values. The first (and earliest) approach
regards the value of a house as a function of a flow of services, such
as shelter, safety, and so on (Muth, 1969). Crime is regarded here as a
disamenity. The second approach treats the value as a function of
characteristics of the house: square feet of living space, the number of
bathrooms, size of the lot, and so on--the hedonic approach. Frequently
included in studies that employ the latter approach are neighborhood
characteristics, such as age, income, and racial composition, rates of
home-ownership, and job profiles, among others.

The earliest attempt at isolating the effect of crime on property
values was made by Thaler (1978). Like later efforts, Thaler used a
hedonic price model and regressed the per-acre price of land on a host
of neighborhood-specific variables. His conclusion was that a
one-standard-deviation increase in the crime rate (property
crimes/population) pushed down the per-acre land price by $3,847 and the
price of a house by approximately $430. Hellman and Naroff (1979) found
similar results, suggesting that a 1.0 percent decrease in the crime
rate increased residential property value by $2,300,000.

Rizzo (1979), using crime, property, and rent data from Chicago,
found that a 10.0 percent decrease in crime tends to increase property
values by between 2.0 and 4.5 percent. Like Hellman and Naroff, Rizzo
used an aggregate measure of property value for community areas in
Chicago but was the first to employ a two-stage least-squares model,
where the crime rate was made endogenous (all previous research had
taken crime exogenous). Buck et al. (1993) also found aggregate property
values suffered as crime rates increased, but increases in tax rates
would ultimately pay for themselves via higher property values.

Three remaining studies, Bowes and Ihlanfeldt (2001), Gibbons
(2004), and Linden and Rockoff (2006), are similar in their unit of
observation: the sale price of a single-family house; the empirical
strategy pursued: hedonics; and the results generated. All three studies
found a generally negative relationship property prices and crime.
Linden and Rockoff (2006) used the residential location of a convicted
criminal as their dependent variable, but found that the proximity of a
convicted criminal and property values are negatively related and
significantly so.

One important issue to consider in evaluating the literature on
crime and property values is the measure of crime used in each study. To
date, most research has used some index of criminal acts per capita,
such as violent or property crimes. While this approach is the most
common, it does ignore the varying impact that crimes of different types
have on quality of life, property, earnings, and so on. Only one study,
Lynch and Rasmussen (2001),has employed a measure of crime other than
per capita incidence. Using a wide range of property-specific and
neighborhood variables from home sales in Jacksonville, Florida, the
authors estimated the marginal impact on house prices of the crime rate
for violent and property crimes but also the "cost of crime;'
which is assumed to be higher for more violent crimes, such as murder
and rape, than for property crimes, such as burglary and vandalism. This
approach has a great intuitive appeal as well as a firm grounding in
research.

While there is no single "correct" way to measure the
cost of a crime, the authors used estimates from another study, et al.
(1995), and arrived at some interesting conclusions about the impact of
crime on property values. First, when compared to a per-capita approach
to quantifying crime, using the cost of crime generates much lower
elasticities of housing prices with respect to crime, implying that the
cost of crime has a much lower impact on property values than suggested
in earlier research. (Not surprisingly, violent crime a more negative
impact on prices than does property crime.) Second, property values are
likely to be lower, all else constant, in high crime areas. The authors
estimated that all else held constant, the price of an average house in
a high crime area would be discounted from $94,000 to $57,000, a
declination of nearly 40.0 percent. Further, certain housing
characteristics, such as a fence or a large lot, are more highly valued
in high crime areas, presumably because they provide a greater barrier
from the street. The policy implication of this second conclusion will
be discussed later.

The theoretical effect of property values on crime is ambiguous. An
area with higher property values could be a more attractive target for
criminals, holding transportation expenses and probability of detection constant, and thus could experience a higher crime rate. Alternately,
higher property values imply a greater opportunity cost of engaging in
crime (i.e., lost wages), which could reduce the incidence of crime in a
high property value area. While many of the studies that examined the
effect of crime on property values do control for the likelihood of
criminal behavior in a given area, (1) there is no little research on
which comes first, low property values or crime. However, Bowes (2007)
addresses a similar issue: the relationship between retail development
and crime. The author examined whether crime is attracted to retail
development or discourages such development. When considering all types
of crime, the author found that both hypotheses are supported. Retail
development both attracts crime and is adversely affected by crime. But
when separating crime into categories, the author found that violent
crime reduces retail development, where property crime is attracted to
it. This supports the notion advanced in Lynch and Rasmussen (2001) that
in order to estimate the impact of crime, one must consider not just
incidence, but cost as well. Different categories of crime can have
different effects on the community at large.

Finally, there are the public policy implications of the literature
and property values. Many authors provided estimates of how property
values, and in some cases tax revenues. would be impact by a given
reduction in crime, as mentioned above. One would expect that higher
property taxes would decrease property values and that a reduction in
crime would increase property values. The question of which effect
dominates is unresolved in the literature. Most of the studies cited
here found a relatively inelastic response of housing prices to crime,
although Naroff et al. (1980) found a much more elastic responses. Their
results indicated that a 1.0 percent decrease in crime rates increased
housing values by almost 1.7 percent. This result pointed to the
conclusion that a city can realize a net increase in tax revenues from
raising tax rates to pay for more police and a reduction in crime, a
striking policy implication.

Further, there is the issue of how best to allocate tax revenues in
an effort to prevent a loss in property values. Because there is such a
marked discount on housing located in crime areas, Lynch and Rasmussen
(2001) suggest that tax dollars would best be spent in preventing
neighborhoods from "crossing the high crime threshold" and
reducing the size of the local tax base.

It is this last point that is perhaps most prescient for Memphis.
While many neighborhoods in Memphis have already gone over the edge in
terms of crime and other disamenities, the research above suggests that
intensively targeting tax dollars in such neighborhoods might be the
best strategy in combating crime. The map below is taken from the
Memphis Crime Stories website and shows the incidence of crime in the
Orange Mound neighborhood on March 28, 2007. Although there is some
crime dispersed across the general area, a great amount of crime is
concentrated in a very small area. And, while one crime map of one
neighborhood on one day does not good policy make, it is clear that
crime affects much more than just property values in our city.

References

Bowes, David R. "A Two-Stage Model of the Simultaneous
Relationship Between Retail Development and Crime." Economic
Development Quarterly, 21, 1, 79-90, February 2007.

Linden, Leigh L. and Jonah E. Rockoff, "There Goes the
Neighborhood? Estimates of the Impact of Crime Risk on Property Values
from Megan's Laws," Working Paper 12253, National Bureau of
Economic Research, May 2006.

Lynch, Allen K., and David W. Rasmussen. "Measuring the Impact
of Crime on House Price?' Applied Economics, 33, 1981-1989,
December 2001.

Muth, Richard E, The Spatial Pattern of Urban Residential Land Use,
The University of Chicago Press, Chicago and London, 1969.

Naroff, Joel L., and Daryl A. Hellman. "Estimates of the
Impact of Crime on Property Values." Growth and Change, 22, 24-30,
October 1980.

Thaler, Richard. "A Note on the Value of Crime Control:
Evidence from the Property Market." Journal of Urban Economics, 5,
137-45, January 1978.

(1) This is typically accomplished by "endogenizing"
crime via a two-stage regression model, where the rate of crime is
estimated from various area-specific variables and then entered as an
explanatory variable in the property value equation.

Douglas A. Campbell, Economics Instructor, joined the University of
Memphis Department of Economics faculty in August 2006. Previously, he
was a visiting Assistant Professor in the Department of Economics in the
Andrew Young School of Policy Studies at Georgia State University, where
he obtained his Ph.D. in Economics in 2004. His doctoral research was on
the economic incidence of development impact fees, an area in which he
is still active. His current working papers focus on
inter-jurisdictional impact-fee competition, and impact fees and housing
market growth. Lately, he has branched out into research on crime and
housing markets.

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